Economics Theses and Dissertations

Permanent URI for this collectionhttp://hdl.handle.net/1903/2763

Browse

Now showing 1 - 4 of 4

Economic Analysis of State Lotteries in the United States
(2004-07-06) Zhang, Ping; Evans, William N; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
Modern lotteries in the United States are run exclusively by state governments. In many cases, states establish separate lottery agencies to administer and promote the games. One statutory duty of many lottery agencies is to maximize the net revenue of the games, hence, all agencies engage in advertising. There is however constant pressure from state legislatures to reduce advertising budgets because of the concerns about the efficacy of advertising in increasing sales, as well as the distaste for the state government's promotion of lottery. Existing literature suggests that the marginal effectiveness of advertising decreases as the quantity of advertising increases. To provide empirical evidence on whether an additional advertising dollar increases lottery sales, we examine quasi-experiments in three states (Illinois, Washington, and Massachusetts) where advertising budgets of state lotteries were exogenously curtailed by the state legislature. We find that the elasticity of advertising is 0.07-0.16, suggesting that a one-dollar decrease in advertising spending could cost the state government $9-10 of the net revenue at the margin. Contrary to the belief of some legislatures that state lotteries spend too much on advertising, our results suggest that they may advertise too little in terms of maximizing the profit. Out of the thirty-eight states with lotteries, sixteen earmark lottery profits for primary and secondary education. Given the fungibility of money, economists have questioned the effectiveness of the earmarking policies. Using a panel data set of states with lotteries, we find that 60-80 cents out of an earmarked dollar is spent on public education. In contrast, each dollar of lottery profit increases school spending by about 50 cents in states that deposit profits into the general fund, and by only 30 cents in states that earmark profits for areas other than education. Using a Bayesian estimation procedure for inequality restrictions in the normal linear least squares model, we find there is a high likelihood that a dollar of earmarked lottery profits generates less than a dollar of spending on K-12 education, but more than the spending generated from a dollar of lottery profits put into the general fund.
Essays on Advertising and Price Collusion
(2005-09-02) Singh, Kartikeya; Minehart, Deborah; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
Chapter I: Persuasive advertising alters consumers' tastes and creates brand loyalty. The established view in the economics literature is that such advertising is anti-competitive and results in higher prices. This paper demonstrates that this is not necessarily true. This is shown in a model of a duopoly with horizontal product differentiation, where firms interact repeatedly over an infinite horizon. Firms in such a market try to increase their profits by avoiding price competition. They do this by colluding on price while making independent decisions on advertising. This practice is called price semicollusion. However, collusion on price leads to intensified advertising, which may lower firm profits to below the competitive level when advertising is market-stealing (rather than market-expanding). In such a case the collusion on price would break down and firms would revert to price competition. Thus, persuasive advertising can induce price competition. Moreover, the paper shows that the equilibrium price in a market with persuasive advertising can be lower than the price without it. This contradicts the prevalent view on the effect of persuasive advertising. Chapter II: This paper examines the effect of advertising on price collusion using data on price fixing across manufacturing industries in the United States. I construct an original dataset from summaries of price fixing cases initiated by the Department of Justice between 1960 and 2003. In determining if advertising hinders or facilitates price collusion, the paper makes a distinction between market-expanding and market-stealing advertising. The need for the distinction between the two kinds of advertising is driven by the theoretical model outlined in the paper. The model shows that price collusion results in intensified advertising. This could undermine the gains from collusion if advertising is market-stealing rather than market-expanding. The paper identifies two types of industries where advertising is more market-stealing: (1) Industries with low market growth and (2) Industries with high product differentiation. The econometric results from a probit model provide evidence that supports the theory. The incidence of collusion is found to be lower in low-growth industries with high advertising. Collusion is also found to be less likely in product differentiated industries with high advertising.
Essays on the Impact of Social Influence in Industrial Organization and Political Economy
(2020) Dalmia, Prateik; Filiz-Ozbay, Emel; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
This dissertation theoretically and experimentally investigates the impact of social pressures in markets and politics. In the first chapter, I provide a micro-foundation for persuasive advertising of conspicuous goods that can either be made more attractive by greater popularity ("conformist markets") or by greater exclusivity ("snobbish markets"). Consumers are endowed with a latent attribute measuring some aspect of their identity, and a social status implied by this attribute. Consumers wish to signal a high status, and the function of advertising is to render brands a signaling device by linking products with social identity. In a conformist market, I find that advertising increases demand elasticity, inducing firms to converge on low prices, and can be used by a first mover to deter entry and gain monopoly rents. In this setting, advertising creates a cutthroat environment in which only one product can survive. In a snobbish market, advertising reduces demand elasticity, dampens price competition and promotes firm entry. In this setting, advertising can act as a public good to firms, increasing all firms' prices and profits. Additionally, it can lead to asymmetric equilibria where a firm appealing to high status consumers advertises more heavily, capturing a greater market share and charging a higher price. In the second chapter, Emel-Filiz-Ozbay and I consider a moral hazard problem where workers decide how much effort to put into individual projects that can succeed or fail. In our setting, workers may receive feedback about a partner's outcome, and such pay comparisons might influence their effort. We perform a laboratory experiment and find that subjects who failed increase their effort the next round. Moreover, subjects who failed while their partner succeeded increase their effort more than those whose partner also failed -- consistent with an aversion to being behind. We find that this effect is more pronounced for female subjects than male subjects. In the third chapter, Allan Drazen, Erkut Ozbay and I study the potential tension between between intrinsic reciprocity and forward-looking, instrumental motives. We perform an experiment in a political economy context where incumbent officials may have two competing desires. The first is the intrinsic desire to reciprocate to the kind actions of past voters by investing in policies favorable to them; and the second is the selfish desire to be reelected by investing in policies favorable to future voters to signal policy preference congruence with the latter. Our key finding, both theoretically and experimentally, is that when future and past voters do not perfectly overlap, reelection motives may constrain the intrinsic reciprocity of an elected leader to the voters who put her in office, but do not eliminate it entirely.
Information, Consumer Choice and Firm Strategy in an Experience Good Market
(2008-08-19) Chen, Yan; Jin, Ginger; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
This paper models how consumers make brand choice when they have limited information. In an experience good market with frequent product entry and exit, consumers face two types of information problems: first, they have limited information about product existence; second, even if they know a product exists, they do not have full information about its quality until they purchase and consume the product. In this paper, I incorporate purchase experience and brand advertising as two sources of information, and examine how consumers utilize them in a dynamic process. Specifically, to address the awareness problem, I model the consumer choice set as a function of experience and advertising, which varies across consumers and evolves over time. In terms of quality, I allow a first-time consumer to infer product quality from advertising. Once she buys the product, she learns the quality perfectly. To better capture the dynamics, I incorporate habit formation conditional on each consumer's purchase history. The model is estimated using the AC Nielsen homescan data in Los Angeles, which records grocery shopping histories for 1,402 households over six years. Taking ready-to-eat cereal as an example, I find that consumers learn about new products quickly and form strong habits. More specifically, advertising has a significant effect informing consumers of product existence and signaling product quality. However, advertising's prestige effect is not significant. I also find that incorporating limited information about product existence leads to larger estimates of the price elasticity. Then I use instrument variables based on differentiated-products firm competition models to address the endogeneity problem of price and advertising with unobserved brand characteristics. Based on the IV estimates, I summarize the substitution pattern and simulate consumer choices under counterfactual experiments to evaluate a number of brand marketing strategies and a policy on banning children-oriented cereal advertising.